Annuity Factor Method

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

BREAKING DOWN 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Annuitization Method

    A type of annuity distribution structure that gives the annuitant ...
  3. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  5. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  6. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
Related Articles
  1. Taxes

    Recharacterizing Your IRA Contribution or Roth Conversion

    Learn why you might make such a transaction and find out how to calculate how it will affect you.
  2. Retirement

    Traditional IRA Deductibility Limits

    Find out whether you can take a tax deduction on the contributions you make.
  3. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  4. Retirement

    Making Spousal IRA Contributions

    Eligibility requirements, contribution limits and tax deductions all change with one little ring.
  5. Retirement

    Avoid the Most Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  6. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  7. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  8. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  9. Entrepreneurship

    Business Owners: How To Set Up An SEP IRA

    SEP IRAs are simple to set up and run, making them a popular choice for business owners.
  10. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
RELATED FAQS
  1. Can I borrow from my annuity to put a down payment on a house?

    Learn how you can borrow money from an annuity for a house down payment, but also understand why fees and penalties make ... Read Answer >>
  2. What is a tax-free 1035 Exchange?

    A Section 1035 Exchange refers to the replacement of an annuity or life insurance policy for a new one without incurring ... Read Answer >>
  3. How are life insurance proceeds taxed?

    Generally, life insurance death benefits that are paid out to a beneficiary in lump sum are not included as income to the ... Read Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ... Read Answer >>
  5. How liquid are variable annuities?

    Understand whether variable annuities are liquid. Learn more about the two types of variable annuities and which is more ... Read Answer >>
  6. Do variable annuities have RMDs?

    Learn what types of variable annuities are subject to required minimum distributions (RMDS) and how they may affect living ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center